High prices must to offset lower output

Oil prices should stay strong to encourage producers to invest in capacity expansion and offset a natural decline in output from major fields, the head of the world's largest hydrocarbon producing company has said.

Khalid A Al Falih, President and CEO of the state-owned Saudi Aramco, said volatile crude prices act as a dissuading factor in capacity investments and this could create a fresh oil supply crisis in the future.

Addressing a recent energy conference in Cancun, Mexico, Al Falih said uncertainties in the industry due to unpredictable prices and inaccurate forecasts on demand could have disruptive effects on the flow of capital for new capacity and this could hamper supply and cause price spikes.

"Perhaps the greatest source of uncertainty in energy markets is price volatility," Al Falih said, referring to sharp price fluctuations over the past 20 months.

From a peak of $150 a barrel in mid 2008, crude prices crashed to only around $35 a few months later because of the global fiscal distress before rebounding to nearly $80 over the past few weeks, he said. "These gyrations pushed many investors to the sidelines. Reasonably stable and predictable prices are critical drivers for investments," he added.

"Prices should be adequate to encourage investments to expand supplies as well as offset the significant declines from ongoing production from both conventional and unconventional energy sources," said Al Falih.

Other investment barriers cited by Al Falih in the oil and gas sector are rising development costs, long cycle times for petroleum projects and the uncertainty of long-term projections for oil demand. "During these long development times, a host of key economic factors can change, impacting a project's profitability or even its viability," he said.

In recent remarks, a senior Arab oil official said regional hydrocarbon producers need to be reassured by major consumers over oil demand growth so they can push ahead with investment in capacity development. "The GCC countries recognise the importance of their role in ensuring sufficient hydrocarbon supplies to the world and meeting the expected increase in demand following the global economic crisis," said Abbas Naqi, Secretary General of the Organisation of Arab Petroleum Exporting Countries (Oapec).

"They are ready to press ahead with investments in all parts of the hydrocarbon industry… But to continue with these investments requires stability in the oil market and guarantees for demand. Unfortunately, such projects and investments are obstructed by the policies of major hydrocarbon consumers and their measures to lessen reliance on oil and find alternative energy sources," said Naqi.

His figures also showed the six-nation Gulf Co-operation Council (GCC) pumped around 19.2 per cent of the world's total crude oil supplies and nearly 8.4 per cent of the global marketed natural gas in 2008. Their share of the oil market could have dipped slightly in 2009 because of massive supply cuts by three Gulf oil heavyweights – Saudi Arabia, the UAE and Kuwait.

Naqi said the easing of the global financial crisis and signs of a gradual recovery in the world economy means that crude demand is starting to pick up.

"This means that an increase in the world's reliance on the Gulf oil in the future is inevitable. This in turn places additional responsibility on the GCC countries to pursue their capacity expansion plans and development of their hydrocarbon sector, including production, exploration, refining, gas liquefaction and petrochemicals.

"This of course will require massive investments."

According to the Kuwaiti-based Oapec, which groups 10 Arab oil producers, the total energy investments in the Middle East and North African during 2010-2014 is estimated at around $385 billion (Dh1.4 trillion).

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